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Daily analysis 22.11.2016

22 Nov 2016 11:30|Marcin Lipka

Profitability of the American two-year treasury bonds are above their six-year maximum. Delicate suggestions from the Federal Reserve vice-chairman regarding changes in fiscal policy. The zloty is slightly gaining value, but internal weakness of the Polish currency is still present.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

  • No macro data that could significantly impact the analyzed currency pairs.

Shallow wear-off on dollar

Taking into consideration the recent appreciation scale of the American currency, the work-off of the USD growths since the week’s beginning seems relatively shallow. However, it’s worth noting that this is mostly the effect of increasing future American interest rates, which is observed in the bond market, among others.

This morning, profitability of the American two-year treasury bonds went above 1.10%. This means that they are at their highest level in more than six years. Return rate of the ten-year treasury bonds is relatively high as well (approximately 2.3%).

Of course, the bond market is closely related to interest rate market. Today, the press informed that the likelihood of rate hikes in December is at the level of 100%. However, this information is not the most important. It’s more significant, how investors will estimate the likelihood of monetary tightening in 2017.

Before the results of the American presidential elections have been announced, OIS was showing only 4% of likelihood that the American interest rates will be within the range of 1.00-1.25% in June 2017 (which means three hikes by 25 base case points each, in comparison to the current level.) Currently, the likelihood of this scenario is at the level of approximately 20%. The OIS data also shows that the likelihood of four or more rate hikes in 2017, is at the level of 17%.

If tendencies in bond market and interest rate market do not change, the chances for a larger working-off of the dollar’s growth will be limited. On the other hand, the chances that the dollar will be growing stronger against developed market currencies, as well as against emerging market currencies, will increase.

Fischer on fiscal policy

Yesterday, the Federal Reserve vice-chairman, Stanley Fischer, made a short testimony in New York. This was summarized with the Q & A session. Moreover, he gave an interview with CNN International last evening.

Fischer’s statement was quite short. However, he referred to changes in fiscal policy. Fischer claims that, “fiscal policy, especially actions that increase productivity, may increase economic potential and help to face some economic challenges.”

The FOMC representative also said that, “a certain combination of improvement in public infrastructure, better education, encouragement to private investments and more effective regulation system, plays a significant role in higher economic growth, as well as in improvement of life standards.” Even though such statements are not revolutionary, they show that the Federal Reserve encourages the current administration to increase fiscal expenses. However, the Fed emphasizes that these expenses need to be addressed correctly.

During the Q & A session, Fischer claimed that, “higher interest rates are a sign of trust (to the economy – author’s footnote).” He also said in CNN that infrastructural investments may increase the American productivity.

It seems that the Federal Reserve will try to sustain positive tone of expected increase in fiscal expenses. On one hand, this may really contribute to potential economic growth. On the other hand, this may also make rate hikes easier for the Fed. If expectations regarding higher expenses continue to fulfill, the dollar may continue to be stimulated by higher likelihood of rate hikes.

Calm and at low level

Very weak data from the Polish economy, which was published by the Polish Central Statistical Office yesterday, didn’t cause a clear wear-off of the zloty. However, it’s worth noticing that they have appeared in relatively calm global conditions. If the USD strengthens more, investors will quickly recall the danger of low GDP reading, as well as discussions regarding rating’s downgrade and monetary easing. This would cause a reaction on the zloty, which will definitely be more nervous than on other emerging market currencies.

We also need to keep in mind that despite a decline of the EUR/PLN below 4.42, as well as a decrease in the USD/PLN to 4.15, the zloty remains weak against the forint (near its three-year minimum). Therefore, lower evaluation of the euro, as well as of the dollar, is only a result of improvement in global sentiment towards the emerging market currencies, rather than an increase in the zloty’s strength.


22 Nov 2016 11:30|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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